Chipotle Mexican Grill Inc. (CMG, Financial) is on the Wall Street radar this week. On Wednesday, the company reported $127.1 million in earnings, or $5.36 per share, that beat analysts' estimate of $4.92 per share on revenue of $1.75 billion.
"Chipotle is off to a great start in 2021 thanks to our employees and their incredible level of collaboration and tireless dedication," Chairman and CEO Brian Niccol said. "As vaccines roll out and we get closer to moving past this pandemic, I believe Chipotle is well-positioned for growth. I'm excited about our future as we remain focused on innovating in culinary, leading in food with integrity, and providing convenient access inside our restaurants and through our expanding digital ecosystem."
That should be music to the ears of Wall Street bulls who sent the company's shares higher in early trading.
But Quo Vadis Capital president John Zolidis thinks investors shouldn't be chasing the stock, as the good news is already reflected in the stock's current price.
"Our view is that the bull case is unlikely to be derailed in the near-term as long as sales momentum remains strong, and easy comparisons will aid the appearance of the headline metrics," he said. "Nevertheless, we are uninterested in chasing the stock at these levels, which at more than EV 5x 2022 revenues and nearly EV 30x 2022 EBITDA, are discounting much if not all of the optimistic investment case."
At the current price of around $1,500, Chipotle's shares are trading well above its GF Value of $914.48. Also, it has a PEG of 2.37, which makes it expensive even when adjusted for growth.
| Metric | Value |
| GF Intrinsic Value | $914.48 |
| Forward PE | 65.36 |
| PEG | 2.37 |
But there are a couple of more issues that should worry investors. One of them is the company's sluggish pace of new store openings, causing a leveling off of the total number of stores in operation. A slower store opening could taper the company's feverish growth, further undermining its valuation.
Then there's the company's declining economic profit, the difference between return on invested capital and weighted average cost of capital, which has dropped from 21% five years ago to near-zero recently. A declining economic profit is a sign that the company has become less effective in deploying capital effectively. It is also an indicator that the company's competitive advantage may be eroding as more competitors enter its market.
The bottom line is Chipotle's shares seem to have run ahead of the company's fundamentals at this point. Investors should be cautious about adding more shares to their portfolios at current price levels.
Disclosure: No positions.
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